The appropriation of the value of biological diversity

The problem of appropriating international flows of wholly intangible services has been recognised and addressed for over 100 years. The very first truly international convention, the Paris Patent Union, was on precisely this subject; it attempted to create in 1868 an international mechanism for repatriating compensation to those who invested to generate information. Since that time a very substantial body of national and international law has developed around the idea of generating such flows, and these laws are known collectively as 'intellectual property rights' (IPR).

As will be demonstrated in this chapter, however, there is little in common between IPR and traditional property rights. The latter deal mainly with tangible commodities capable to exclusive possession and clear delineation. IPR deal almost exclusively with informational services, which are intangible and amorphous; they are not readily susceptible to either possession or delineation.

An IPR regime deals with this difference through the mechanism of 'surrogate rights', namely monopoly rights delineated in a dimension that is tangible in lieu of rights in a dimension that is not. The one acts as a surrogate for the other, in order to encourage investments in the intangible resource.

This section first describes the theory and application of surrogate rights and then demonstrates the application of this theory in the conservation of biological diversity. Again, IPR regimes are important mechanisms to consider because they might potentially address the core of the problem of extinction; that is, inappropriable service flows from diverse resource stocks, and/or they might provide a market-based mechanism for registering consumer preferences for biodiversity's services.

Failures in property right regimes: unchannelled benefits A generalised statement of the purpose of decentralised management regimes is the encouragement of investments at the most efficient level of society, namely by those individuals who have the information and capability to invest most effectively in a particular asset (Hart and Moore, 1990). A very general statement of the nature of a decentralised management regime is a mechanism that targets individuals making socially beneficial investments with awards approximately equal to the benefits generated.

This is the nature of a property rights regime; it is a mechanism for channelling benefits in a concentrated form through the hands of investors. It accomplishes this through the monopoly right known as a property right, which is a carefully delineated monopoly in the flow of goods and services from some specific asset. With the institutionalisation of the monopoly (and thus the assurance of the expectation that the state will invest to channel the asset's flow of benefits initially through the 'owner'), the individual is given the identical incentive framework as society's; that is, the 'owner' will invest in the asset until the marginal benefit equates with the marginal cost (which will produce a globally efficient result so long as there are sufficient numbers of competing producers in the same product markets).

For these reasons, property right regimes are very useful mechanisms for inducing efficient levels of investments in various assets. Some forms of assets, however, are not amenable to the application of property right institutions because their benefits are not readily channelled. In general, property right institutions operate well if the flow of goods and services is densely concentrated in at least one 'dimension' at one point in that flow. Then it is possible to delineate and segregate the investor's flow from others', and hence to channel that flow. For example, most of the benefits from standard agricultural production (the produced commodities) are appropriable by the demarcation of exclusive rights in the land; the individual associated with a particular parcel of land (the 'owner') has the exclusive right then to the entire flow of benefits (produce) from that parcel. In this instance, there is a close correspondence between the total benefits generated and the benefits individually appropriated at one point in the process (namely, at the point where the commodities are being produced on the land).

Many assets are not of this nature. Some have the characteristic that their benefits are instantaneously diffusive, so that investments in the asset generates benefits throughout a wide area. Others are of the character that their benefits diffuse rapidly and it is costly to segregate between beneficiaries and non-beneficiaries of the flow. This is the general nature of assets that are not easily subjected to property rights institutions: the flow that they generate is too disorganised to be readily channelled. It is not easy to discern the point at which the award of a monopoly right will capture a significant part of the flow of benefits.

Consider again the first example of a globally-recognised public good; that is the information developed for industrial applications that was the subject of the Paris Patent Union. Investments in such information are not readily generated in the context of a property rights regime, and so industry lobbied for novel forms of institutions (although confusing the issue by use of the same name 'property rights' to describe the new institution).

Information is a global public good for two reasons. First, information as a product has an innate capacity for diffusion, as remarked on in Arrow's Fundamental Paradox of Information. The paradox states that information is not marketable until revealed (because its value is unknowable prior to revelation) whereas the consumer's willingness to pay can be concealed after revelation of the information (because the transfer has already occurred). In addition, information is often revealed on the mere inspection of a tangible product within which it is embedded. Therefore, the mere act of marketing of a product created from useful information often releases that information to the world, rendering it far less valuable.

Second, it is extremely difficult to segregate between information flows. This is because all information is built on a common base (the common understanding that makes up all knowledge and language) and there are a multitude of potential pathways leading to the same conclusion. Therefore, an attempt to segregate between the path leading to one piece of information and the entirety of the remaining body of knowledge is an unlikely task, because it implies an attempt to untangle all ideas back to the common starting point.

As an example, consider the innovation of heat resistant, resilient plastics sometime during the past 50 years. Most people site this innovation with the US space programme, where these substances were introduced in order to serve various purposes on the exteriors of space craft. With the use and observance of this information (i.e. the idea of durable uses for synthetic polymers), this idea diffused throughout the world economy. Soon, durable plastics appeared in the entire range of products, from automobiles to pots and pans. Even assuming that all of the consumer benefits from the use of these new products derived from the innovation at NASA, it would be very difficult to delineate clearly between the various uses (of a wide range of different polymers) or to trace their diffusion from the single point.

The nearly instantaneous diffusion of this idea throughout the economy demonstrates the difficulty of using property right regimes to induce investments in a global public good, such as information. The benefits are never concentrated enough at one point in time to be channelled through the hands of an individual investor, because they diffuse so quickly and completely. For these reasons, other mechanisms than property right regimes must be used to encourage invesments in assets that generate these types of flows.

The role of surrogate right regimes (and 'IPR' regimes)

An alternative to a property right regime is a surrogate right regime. Such a regime operates by channelling benefits to an investor from a monopoly right in a tangible good, as a reward for effective investments in an asset generating a non-tangible flow. In short, the surrogate right regime sidesteps the problem of non-appropriability by substituting a surrogate monopoly right (in a dimension that is suitably appropriable) for the impracticable property right in information. This is the nature of an IPR regime: it substitutes an appropriable flow for an inappropriable one in rewarding information-generating investments.

To understand how an IPR regime operates, consider again the example of the innovation of durable polymers. An IPR regime does not attempt to protect the investment of the agent who generated this fundamental idea; this would be impracticable for the reasons mentioned above. Instead, the IPR regime allows the agent to stake a claim in a carefully specified area of 'product space' where the idea is to be introduced; that is, the laws of patent do not offer rights in the idea itself ('durable synthetic polymers') or to the entire range of products to which this abstract idea is subsequently applied ('all uses of resilient plastics from pots and pans to automobiles'). Instead, the applicant for a patent right must select a reasonable range of specific products that will make good use of the idea, and claim monopoly rights in the marketing of these. The inventor patenting the use of resilient synthetic polymers in pots and pans would not necessarily have any claim to a monopoly over their use in any other consumer goods, such as automobiles.

These benefit systems are not of the nature of property right systems, but instead constitute a type of hybrid system for making awards to investors in information generation ('investors'). The general problem that the state must solve is how to create a cost-effective 'prize system' that will target efficient inventors accurately (in terms of identity and size of award) when the basic product is of such a nature that a pure property rights system is impracticable. It is not at all clear a priori that a surrogate rights regime is the most efficient institution for addressing this problem, but it is an interesting and internationally important example of a method for flow appropriation. There are several trade-offs involved in this particular solution to the problem, but initially the nature of a surrogate right regime will be detailed.

The theory of surrogate property rights

The problem of creating incentive mechanisms for the production of information is a very general one. The same problem has been analysed in regard to regulating the generation of information at different levels of a firm or distribution network. This analogue will be used to provide a private sector benchmark against which to compare the need for public sector institution-building (Matthewson and Winter, 1986).

Consider, for a concrete example, the problem of a manufacturer of a sophisticated consumer product (such as a personal computer) who wishes to market this product efficiently. The maximum number of sales will occur only if substantial amounts of information are included with the sale, for example, informal demonstrations, lessons and instructions provided to prospective purchasers. For maximum effectiveness, this information must be provided on a decentralised basis (at the retail level), where the interface with the consumer is direct (in order to tailor the demonstration to the needs of that customer). These optimal investments, however, will not occur on a decentralised basis on account of the inappropriability of retailer-generated information; that is, retailers who invest in the provision of these informational services (training of sales personnel, provision of demonstration rooms and equipment) will not be able to compete with those who do not make these investments, because consumers will have the incentive to acquire the (unpriced) information at one retailer and make their purchase at the other. Manufacturers need to construct mechanisms that channel the benefits from informational investments through the hands of their investing distributors, the identical decentralised investment-in-intangibles problem faced by the state in a more general context.

The private sector institution used to address this problem is the 'exclusive territory' regime incorporated within vertical distribution agreements. Such a regime, established by the manufacturer, provides that no other retailer shall be allowed to market the manufacturer's products within a carefully defined territory (from 50th to 195th Street, say). This territorial monopoly right provides a local captive market from which to recoup the retailer's investments in information services. Note that the desired investments are in a wholly inappropriable dimension (information) whereas the monopoly is allowed in an easily demarcated and segregated dimension

(physical territory). The problems of inappropriability in the former dimension are addressed by allowing surrogate rights in the latter.

Analogously, the state needs to supply concrete rights in a dimension that can be demarcated, and product space serves this purpose. In the case of an IPR regime, a market is allocated by the specification of a concrete boundary in product space (as opposed to geographical space in vertical distribution agreements). An IPR regime acts to remedy this distortion in information generation by granting monopolies in certain territories in product space; that is, in recognition of the impracticability of allowing monopolies in information, this regime instead allows monopolies in a range of products which incorporate this information. This supplies a remedy for the first problem of inappropriability (diffusion within industry) while supplying a premium to compensate the firm for the second problem of inappropriability (diffusion across industries).

An example of this is provided by the patent allowed to the innovator of the oversized tennis racquet. The actual innovation involved in that case was the idea that sports equipment sizes and shapes might be optimised; however, this concept (although widely implemented) is too abstract to be appropriable. Instead, the patent alloted to the innovator allowed exclusive marketing rights for all tennis racquets with head size between 95 and 130 sq cm in area. The tennis racquet actually marketed was of a single size, that fell in the middle of this territory; however the entire territory was alloted in order to create the monopoly rent.

The idea of giving 'exclusive territories' as incentive systems for investment in certain assets may be applied even when there is a complete disjunction between the territory given and the asset requiring investment. The inducement of efficient investments requires institutionalised award mechanisms, and all institutions have their own forms of costliness. Surrogate property rights are clearly second-best types of solutions, but this is true of all institutions.

The idea that a 'property right' accomplishes a perfect match between asset and territory is illusory in every instance, giving rise to the prevalence of'externalities'. To advocate 'well-defined property rights' is equivalent to advocating 'perfect competition'. It is important to recognise all property rights for nothing more than what they are: institutionalised incentive mechanisms for making awards (imperfectly) to investors. Surrogate property rights are substantively indistinguishable from all other property rights; they are both 'exclusive territories' operating as award mechanisms for beneficial investments. The difference is quantitative, in the quantity of externalities prevailing under the institution.

The application of intellectual property rights regimes to biodiversity conservation

The entirety of the theory developed in this chapter applies directly to the problem of biodiversity conservation. This is because investments in stocks of diverse resources (species and habitats) generate not only tangible goods and services, but also intangible ones (specifically, insurance and information). On account of the diffusiveness and non-segregability of these services, it is not possible (under existing institutions) to channel these global benefits initially through the hands of individuals living within their host states. This flow of information is only maintained by way of investments in diverse stocks by individuals in the host states. If these diverse assets are not included within state portfolios, then the flow of these services will cease. It is equally important to reward investments in natural capital that generate informational services as it is to reward investments in human capital-generated information. The base problems are identical, only the physical character of the asset involved is changed.

The only element to add to the theory of surrogate property rights is the potential production of valuable information from inputs other than human capital. As has been indicated at several points in this book, this is the essential value of biological diversity: its informational content. It must be recognised that human capital alone may not be capable of producing all important and valuable information. There is also a base biological dimension which generates information.

This biological dimension is the evolutionary process which, through biological interaction and the process of selection, generates communities of life forms that contain substantial amounts of accumulated information. Because the competition for niches is constant and pervasive (occurring at all levels), the naturally evolved life forms contain biological materials which act upon many of the species with which they share the community. A community that has coevolved over millions of years contains an encapsulated history of information that is not capable of synthesisation.

Supplanting a naturally evolved habitat, and slate of species, with a human-chosen slate may confer tangible productivity gains, but it also removes the information that was available from that community. The information from coevolution, the product of the evolutionary process, is lost with the conversion.

The conversion of the last remaining unconverted natural habitats equates with the retention of this evolutionary product, namely the information generated by coevolution. The mere existence of this habitat represents information production, in the sense of the retention of an otherwise irreplaceable asset. Valuable information may be produced by investments in natural capital as well as through investments in human capital.

Consider how the global community can use a surrogate rights regime to conserve optimal biological diversity. The global community is faced with the same regulatory problem as in the case of regulating intellectually-produced information but with slightly different dimensions involved. If natural capital-based surrogate rights were introduced, the benefits to supplier states would flow primarily from allocations of exclusive markets in consumer states, whereas the benefits to consumer states would flow primarily from the retention of natural habitats in supplier states. This is analogous to the object in the case of IPR; the problem is to invest in institutions to maximise the aggregate benefits from informational production for both consumers and suppliers.

In essence, the global community is allocating territories in Northern product markets in exchange for the conservation of designated territories in Southern natural habitats. These rights constitute both ex post awards for past effective investments, but also ex ante awards to encourage investigations for further useful information in those territories. Such awards function in precisely the same way as intellectual property rights in encouraging investment, except that in this case the regime is focusing on natural resource (rather than human resource) generated information.

The supplier states now have incentives to invest in their diverse resources. Host states have the incentive to maintain their resources and investigate them in order to be awarded product market territories, and these states have the incentive to continue to invest in their diverse resources in order to generate new information useful in respect to their market allocations.

The extent of these incentives depends entirely on the breadth and length of the awards. The breadth is determined by the extent of product market allocation, and the length is determined by the duration of the allocation. Different criterion should be used in determining breadth and length. Length should be determined primarily with regard to the costliness of the selection process. Breadth should then be used to establish the desired amount of the award.

As with any surrogate right, it is a more efficient instrument if it is able to capture a large proportion of the information's value in the product space allocated; however, by the definition of information (its diffusive nature), this is not generally possible. It must be recognised that the ultimate object of any surrogate right (intellectual property right) regime is to accurately target prizes to efficient investors in information generation, and that it is only institutional costliness that warrants the use of surrogate dimensions for this purpose. Intellectual property rights, therefore, can be an effective instrument for the generation of a flow of value to states investing in the conservation of biological diversity. This instrument should be considered with the others as a potentially cost-efficient method for conservation.

Many pharmaceutical innovations are developed from a starting point of knowledge derived from the biological activities of natural organisms. When a new start is required, it is often initiated by returning to the uncharted areas of biological activity (unknown plants and insects), but after the long process of product development and introduction, there is no compensation for the role played by the diverse resource in initiating the process. The informational input supplied from the diverse resource system goes unpaid for, and this means that there will be no incentive to invest in the natural capital that generates this information.

An 'informational resource right' system could be constructed that would be analogous to an intellectual property right system. There would not be anything in this that would conflict with existing regimes; it would simply represent an extension of this idea for compensating intangible services into realms other than those deriving from human capital investments. To a large extent, the extension of 'intellectual property' regimes to include natural resource-generated information simply levels the playing field between those societies which are more heavily endowed with human capital and those which are more heavily endowed with natural forms of capital. It is a very rational approach to the resolution of the biodiversity problem, just as the adoption of the Paris Patent Union 100 years ago was a rational approach to the problem of protecting investments in human innovations in industry.

An informational rights regime based on natural resource investments would allocate product market territories in response to effective natural habitat investments. The regime would then operate through central registration and private trading. Effectiveness would be demonstrated initially through the establishment of 'biodiversity reserves', restricted to uses compatible with biodiversity prospecting. A state's programme would qualify for inclusion within the regime by means of investing in biodiversity reserves and establishing prospecting programmes. Then any discoveries within these areas should be made subject to internationally-recognised exclusive rights on registration with some sort of centralised office (analogous to a patent office).

The registration office would then have the responsibility for determining the scope of the monopoly rights afforded by the registration. When such a programme is established, the potentially useful life forms need to be tendered to the registration office, together with a list of the range of chemical, genetic and other characteristics first identified within the species. The panel would then determine two issues: (1) whether an award should be made to the programme, and (2) what characteristics of the life form (chemical, genetic, entire organism) are to be subject to exclusive rights.

The determination of the first issue depends on the believed usefulness of the natural habitat being conserved, the identified life form and its chemical characteristics. Issue two turns on the scope of the right that is required to generate a reasonable return to the investment. Of course, the length of the award is a separate, institutional issue determined uniformly by the costliness of the selection process.

If an award is made, then any subsequent development of a product that incorporates a chemical combination within the scope identified by the registration office must have a licence to do so. In this fashion, a constant source of funding for natural habitat conservation could be maintained in a fashion that both links funding to usefulness and also creates incentives to invest in the source habitat.

Conclusion

It is clear that there is no distinction in substance between investments in information-generating diversity and other information-generating assets (such as other research and development activities). There is no logical reason, therefore, why intellectual property right regimes should not be applied to the conservation of biological diversity. For example, it can be no more difficult to value and assign rights in the services rendered by natural diversity than it is in regard to the 'look and feel' of a computer-user interface (patent granted to Apple Computers). The analogy is direct between the computer software industry and biodiversity conservation. Both 'industries' produce information: one in the variety of the code and one in the variety of the life forms. Both forms of diversity are useful: one in the operation of a computer and one in the operation of the biological production system. Both forms of informational services generate largely inappropriable values unless governments make a concerted attempt to reward the producer.

The primary difference between the application of IPR regimes to software versus biodiversity is the identity of the rewarded producer; a biodiversity-related regime would produce largely North-to-South flows whereas the existing regime produces primarily North-to-North flows (and substantial South-to-North flows). Possibly for this reason, there are massive resources being spent on the reform of the international IPR laws concerning software protection, although there remains little interest in investments in the creation of IPR similar systems for the protection of biodiversity.

If this is the case, then this myopic view of Northern self-interest concerning international IPR regimes completely misses the point. The rationale for an international institution should be the appropriation of the 'gains from cooperation', and in the case of biodiversity, the gains from cooperation inherent when Northern states transfer funds to the South in return for the Southern states' conservation of diverse resource stocks. If properly calibrated, these transfers will be made in a fashion that will reward and induce compensating investments in diversity. For this reason, IPR regimes for natural resources should generate a net gain for Northern states, although the flow of funds under their auspices will be unidirectional North-to-South.

The solution to the global biodiversity problem requires the creation of some mechanism for appropriating the values of evolution-supplied information. If this is not put into effect, then we can expect human societies to replace evolutionary product with their own selections across the face of the earth, simply because the latter are more effective instruments for channelling the biosphere's flow of goods and services to local decision makers. For this reason it is necessary to expand the range of 'global services' that we reward individually beyond the narrow confines of intellectually-generated information. The conservation of diversity and diversity's values will require the creation of a diverse set of international institutions.

References

Arrow, K. (1962a). The economic implications of learning by doing. Review of

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